Governance Basics Every Plan Sponsor Should Know

How do plan sponsors operate and administer employee benefit plans in a manner that is both effective and compliant with applicable regulatory and fiduciary obligations? This work, broadly referred to as plan governance, can be challenging.

There are easily more than 100 required activities for each type of employee benefit plan, and, while many of these can be outsourced, the plan fiduciary still has ultimate responsibility for oversight. Meanwhile, regulatory scrutiny of plan governance has never been stricter, with the IRS, Department of Labor (DOL) and other parties issuing new guidance each year on issues ranging from investment fees to data security. Given the current environment, how can plan sponsors make sure they are not just “checking the boxes,” but are applying best practices in plan governance?

Committee Structure and Responsibilities

Every benefit plan that is subject to the Employee Retirement Income Security Act (ERISA) must designate a “named fiduciary” who is responsible for managing and administering the plan in accordance with ERISA’s fiduciary standards. In practice, most employers designate one or more committees of employees to serve as fiduciaries on the organization’s behalf.

Governance committees can be structured in a variety of ways according to a plan sponsor’s preferences and the expertise and number of available members. Some plan sponsors create separate investment and administration committees. They might also form subcommittees to address specific issues or special projects. Regardless of how the committee is structured, all benefit programs should be covered. For example, retiree health benefits can be governed as part of either health or retirement plan oversight. Nonqualified benefit plans require governance too, even though these plans may not be subject to many parts of ERISA.

A committee’s charter should codify its members’ roles and responsibilities and standardize its protocols. For instance, each committee should meet in accordance with an established calendar; meeting minutes should be written and approved; and committee processes should be clearly documented. Fiduciaries should be provided formal training by the employer’s legal and compliance resources or a credible third party.

Focus on Administration and Compliance

It is common for committee members, who often have financial backgrounds, to focus on investment activities such as quarterly performance reports, fund offerings, economic outlooks, periodic reviews of plan fees and other financial benchmarking data. These topics have been ingrained into the scope of fiduciary responsibilities.

Yet administration and compliance issues are just as important. Committees are responsible for a wide range of plan oversight functions, such as handling participant claims and appeals, maintaining current and historical plan documentation, protecting plan participants’ data privacy and actively managing plan service providers. These topics tend to be less structured and often require expertise in non-financial disciplines such as human resources (HR), legal and compliance, internal auditing, information technology (IT), data security and labor negotiations. Ensuring these activities are properly addressed often requires input from cross-functional teams and vendors.

Issues that require proactive vendor management include monitoring administration processes and procedures; resolving unpaid benefits due to missing or nonresponsive participants; ensuring retirement plan operational failures are corrected timely and appropriately using the IRS’ Employee Plans Compliance Resolution System (EPCRS) guidelines; and establishing cybersecurity policies that ensure plan participants’ data is protected and retained for an appropriate period of time. Plan sponsors should enlist cross-functional team expertise before engaging in strategic activities such as changing vendors or recordkeeping systems; making plan design changes; de-risking pension plans; and merging, spinning off or terminating plans.

Taking the First Steps

Committees can take prudent steps today to ensure they have best practices in place to address both investment management and administration and compliance issues.

For starters, the committee should review its charter and governance calendar to ensure that quarterly investment reviews occur and that administration and compliance issues remain front and center. The calendar will help the committee and its plan delegates actively manage issues and make certain continuous improvements are being made, errors are resolved in a timely fashion and compliance risks are minimized. It is also important that the committee has representative members from diverse corporate functions to address broad benefits administration issues. Plan delegates should have clearly defined responsibilities and be charged with proactively managing vendors rather than reacting to issues as they arise.

Plan sponsors may benefit from engaging an independent consultant to take a fresh look at governance practices and confirm that all required activities are being addressed in a holistic and proactive manner. This type of review can give plan sponsors the assurance of knowing required governance activities are being covered for all benefit plans, the advantage of resolving problems before they are discovered by an outside party and the opportunity to learn about and adopt market best practices.

Building a comprehensive governance structure capable of overseeing investments, administration and compliance issues across all plans is essential to fulfilling plan sponsors’ fiduciary duty and complying with ERISA and other requirements. Moreover, robust oversight ensures all benefits due will be provided to the right recipients in a timely manner, making best practices in plan governance a win-win for plan sponsors and participants.

Leslie Olds, FSA [Fellow, Society of Actuaries], EA [Enrolled Actuary], FCA [Fellow, Conference of Consulting Actuaries], MAAA [Member, American Academy of Actuaries], is a senior benefits consultant and Mindy Zatto, FSA, EA, MAAA, FCA and MSPPA [Member, American Society of Pension Professionals and Actuaries], is a principal of Strategic Benefits Advisors, an independent, full-service employee benefits consulting firm focused on solving complex benefits issues for clients ranging from 1,000 to over 300,000 employees. Olds and Zatto have over 60 years’ combined experience in benefit plan administration and consulting. They can be reached at info@sba-inc.com.

This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services Inc. (ISS) or its affiliates.